The Development of Preferences for Institutions: Evidence from North Korean Refugees Syngjoo Choi Byung-Yeon Kim Seo-young Silvia Kim Jungmin Lee Sokbae Leey August 2015 Abstract We explore the development of support for market economy and democracy among North Korean refugees settled in South Korea since their experiences of socialism in North Korea and capitalism in South Korea make them an ideal sample. We …nd that these refugees exhibit weaker support for both institutions than native-born South Koreans. Nevertheless, exposure to market activities in North Korea is positively associated with preferences for market economy as well as for democracy. Communist Party membership in North Korea and education in South Korea are respectively linked to stronger support for market economy and democracy. Lastly, those who were young at the time of arrival at South Korea assimilate quickly to democracy. JEL Classi…cation: D02, P10, P20. Keywords: institutions, preferences for institutions, market economy, democracy. The paper has bene…ted from suggestions by participants in the WCCE 2015 and various seminars. We acknowledge that this work was supported by the National Research Foundation of Korea through Seoul National University. yJungmin Lee is at Sogang University, Republic of Korea, and is also a¢ liated with the Institute for the Study of Labor, Germany. All other authors are at Seoul National University, Republic of Korea. Choi is also a¢ liated with University College London, United Kingdom, and Choi and Sokbae Lee have a¢ liations with the Institute for Fiscal Studies, United Kingdom. 1 1 Introduction Public support for institutions is a key factor in determining their stability. Lack of support may lead to social instability and potential con‡icts. This problem is particularly pertinent for people whose societies are undergoing institutional transition, such as those in post-Communist countries, and for people who migrate to a new society and face di¤erent institutions and cultural norms. Mounting evidence suggests that institutions have non- trivial, and sometimes long-lasting, impacts on individual attitudes and preferences (Alesina and Fuchs-Schüdeln, 2007; Tabellini, 2008; Aghion et al., 2010). When people are confronted with institutional change, the extent to and the speed with which they assimilate to the new institutions are critical in determining not only the welfare of those individuals but also the outcome of institutional transformation. Thus, it is natural for social scientists to explore factors which a¤ect the development of individual preferences or attitudes toward institutions. In this paper we take the case of North Korean refugees (henceforth, NK refugees) who are settled in South Korea and investigate whether their support for South Korea’skey in- stitutions is di¤erent from native-born South Koreans’and also how their support changes through living in South Korea. The division of Korea into North and South provides a large-scale social experiment in institutional change (Acemoglu et al., 2005; Kim et al., 2014). A major contrast between North Korea’s and South Korea’s institutions lies in po- litical institutions–democracy vs. dictatorship–and economic institutions–market economy vs. socialist economy. We hence focus on NK refugees’ attitudes toward market econ- omy and democracy. We not only compare attitudes toward these institutions between NK refugees and native-born citizens of South Korea, but we also examine factors which a¤ect NK refugees’support for market economy and democracy. We conduct our analysis by sep- arating the e¤ects of NK refugees’experiences with their former society (North Korea) from those with their assimilation in the new society (South Korea). By doing so, we attempt to understand the development of preferences for institutions. Unlike post-Communist countries in Central or Eastern Europe, North Korea still remains governed by dictatorship and its socialist economy, and North Korean people are largely 2 secluded from the outside world. In the mid- and late-1990s during which North Korea experienced severe economic downturn, central planning and public distribution su¤ered a major crisis. Since then, North Korea has gradually allowed for market activities, albeit to a limited extent. The country has also extended its trade with other countries, predominantly with China. How could the recent expansion of market activities a¤ect North Korean’s support for market economy and democracy? To answer this question, we draw special attention to the market experiences of NK refugees in North Korea and their e¤ects on the refugees’support for economic and political institutions. Market activities in North Korea include trading in buying goods at a cheaper price and reselling them at a higher one, as well as selling self-produced goods. While the adaptation to a new society is made through many di¤erent channels, education and participation in the labor market may be important factors determining assimilation (Dustmann and Glitz, 2011; Duleep, 2015). We focus on NK refugees’acquisition of formal education in South Korea in addition to outcomes resulting from labor market participation. We recruited both NK refugees and native-born citizens of South Korea and administered four surveys annually from 2011 to 2014. We collected detailed information on participants’ demographic and socioeconomic characteristics. We also asked a wide range of attitudinal questions on key institutional features of market economy and democracy. Questions related to market economy were comprised of four components: performance pay, market rules, private ownership, and competition. The questions concerning democracy consisted of the following …ve components: multi-party system, freedom of voting, individualism, anti-strong political leader, and human equality. With these detailed responses, we compared the scores of support for each component of institutions across di¤erent groups as well as total scores for market economy and democracy. Despite the uniqueness of NK refugees case, our paper has general relevance to under- standing the formation and development of preferences toward institutions. We …rst note the prevalence of considerable heterogeneity in preferences for institutions across countries. Figure 1 shows substantial di¤erences across countries in the support for private ownership of business and democracy.1 There is also signi…cant variation across individuals within 1 The source of data is World Values Survey Wave 5, 2005-2007. The question of support for market 3 countries. Numerous factors are likely to contribute to such heterogeneity in the attitudinal responses within and across countries. Our paper sheds light on the issue by tapping into the unusual experiences of NK refugees. - Figure 1 here - Our main …ndings are as follows. Firstly, we …nd signi…cant di¤erences between NK refugees and South Koreans in their preferences for both market economy and democracy. NK refugees exhibit weaker support for market economy than South Koreans. This discrep- ancy is mainly driven by NK refugees’ weaker support for private ownership. The inter- Korean di¤erence in preferences for democracy is driven by the di¤erences in preferences for individualism and for a strong political leader when pursuing national development. Secondly, we …nd evidence that North Korean refugees’preferences for institutions are asso- ciated with their experiences in North Korea. In particular, refugees who have participated in market activities in North Korea hold signi…cantly more favorable opinions toward both market economy and democracy. We cautiously take this as an indication that the recent expansion of market activities in North Korea may strengthen the support for market econ- omy and democracy within North Korea. Interestingly, those who were Communist Party members in North Korea tend to be more supportive of market economy. Thirdly, we …nd that NK refugees’experiences in South Korea also matter for their support for institutions. Refugees who receive formal education in South Korea are more supportive of democracy. In particular, receiving education in South Korea is positively related to the extent to which NK refugees value human equality, although it does not seem to a¤ect preferences for market economy. Household income in South Korea is also signi…cantly linked to refugees’higher support for market economy, in particular for private ownership and competition. However, such income e¤ects are not as pronounced for democracy. We contribute to several strands of the literature. First, our paper is closely related to the literature that investigates the e¤ects of life experiences with socialism on individual attitudes and preferences (Shiller et al., 1992; Alesina and Fuchs-Schüdeln, 2007; Aghion et al., 2010; Grosjean and Senik, 2011). Distinct from most studies of the literature, our economy is whether the private or government ownership of business and industry should be increased. The question of support for democracy is how important it is to live in a country that is governed democratically. 4 paper explores multi-dimensional aspects of market economy and democracy. We also relate support for market economy and democracy to experiences with di¤erent institutions in both the old and new societies. Second, our paper is related to the literature of immigrant assimilation. This literature documents a vast amount of evidence on economic, political, social, and cultural assimilation of immigrants into the host country